5 Things to know about RBI’s push for bankruptcy code

The business news headlines on 14th June 2017 read something like this: 12 accounts constitute 25% of overall bad loans. It made everybody sit up and take notice. To think that only 12 loan accounts owed more than Rs 5,000 crore each!

The rest of the news report is equally important—not just the key numbers. The RBI said that it would push these 12 accounts to start bankruptcy proceedings. This is even more notable.

Let’s read why you should follow this issue:

Why is this important?India’s banks have bad loans worth Rs 7.7 lakh crore, as per various media reports. This problem of bad loans has been going on for years. It has only put more and more pressure on banks and their profitability. This makes the whole banking system risky. With RBI identifying the large troubled accounts and pushing them towards bankruptcy could lead to a speedy resolution. This has been widely acknowledged as a ‘bold’ move. Moreover, the RBI has also asked banks to finalise solutions for other bad loans in the next six months. Otherwise, the banks would have to start bankruptcy proceedings against these loan accounts too. This is the latest in the series of actions taken by the RBI to tackle bad loans. Perhaps this is why banking stocks are up over 27% since January 2017, while the Sensex rose just 16.7%.

What will happen to the 12 accounts? The lender has to start a bankruptcy proceeding. The company or individual who borrowed the money will then be referred to the National Company Law Tribunal (NCLT). They will be judged as per the Insolvency and Bankruptcy Code (IBC). This law allows debt-laden companies and even individuals to reorganise their debt. The key aspect of the law is that this whole process takes place within a 180-day window. Of course, this can be extended by another 90 days. But 270 days still a shorter time period.

What is the bankruptcy process? During the six-month period, the NCLT appoints an ‘Insolvency Professional’. This individual takes over the company’s control and runs it. The Insolvency Professional aims to try and turn the company around. She/he may try to restructure the business plan. This has to be approved by the lenders. If the professional is unable to come up with a good plan within the time window, the lenders will then start selling the company’s assets to raise money. This is called company liquidation or insolvency. This can only happen after the 270-day window is over.[Source]

The challenges: The process will not be easy. For starters, the law is fairly new—it was enacted in 2016. The bankruptcy and insolvency process has not been tested yet. A Kotak Institutional Equities report suggested that so far, no case has been resolved. “Experts we spoke to suggest a two-year window for the law to be fully functional. Referring large cases at such an early stage is a risky approach,” the Kotak report said. That said, if the process works, it could be a game changer, the report added. Another challenge is that there may not be enough experienced professionals to solve such cases. This could mean extra delays or worse, improper solutions.

What it means for banks: Starting bankruptcy proceedings is not a common move. Banks would need detailed guidelines from the RBI about the whole process. But the biggest risk is about potential losses to banks. When you sell assets of a company, you get the current market rate. However, industries like power and steel are not in the best state. So, market rates could be much lower today. This means banks may be able to recover a significant portion of the loan. This is called a haircut. High haircuts can put stress on a bank’s profitability.( Read more: 5 ways to tackle India’s debt problem)

25,000

A report by consulting firm Alvarez & Marsal suggested that the NCLT already has 25,000 pending cases. Moreover, with the current staff strength, the NCLT could take over 7 years to clear these cases, according to the Livemint report dating January 2017. So, an addition of cases could cause an extra backlog. However, news reports suggest that the 12 accounts would be pushed to the top of the priority list.

No need to issue cheques by investors while subscribing to IPO. Just write the bank account number and sign in the application form to authorise your bank to make payment in case of allotment. No worries for refund as the money remains in investor's account.

KYC is one time exercise while dealing in securities markets - once KYC is done through a SEBI registered intermediary (broker, DP, Mutual Fund etc.), you need not undergo the same process again when you approach another intermediary. Attention Investors Prevent Unauthorized Transactions in your demat / trading account --> Update your Mobile Number/ email Id with your stock broker / Depository Participant. Receive information of your transactions directly from Exchanges on your mobile / email at the end of day and alerts on your registered mobile for all debits and other important transactions in your demat account directly from NSDL/ CDSL on the same day." - Issued in the interest of investors. Circular No.: NSDL/POLICY/2014/0094, NSE/INSP/27436, BSE - 20140901-21

Kindly note that as per NSE circulars nos: NSE/INVG/36333 dated November 17, 2017, NSE/INVG/37765 dated May 15.2018 and BSE circular nos: 20171117-18 dated November 17, 2017, 20180515-39 dated May 15.2018, trading in securities in which unsolicited messages are being circulated is restricted. The list of such stocks are available on the website of NSE & BSE. In case of any queries, request you to kindly get in touch with Customer Service on 18002099191/9292

Kotak Securities Ltd. bearing licence no. CA0268 is a Corporate Agent of Kotak Mahindra Old Mutual Life Insurance Ltd. We have taken reasonable measures to protect security and confidentiality of the Customer Information.

The Stock Exchange, Mumbai is not in any manner answerable, responsible or liable to any person or persons for any acts of omission or commission, errors, mistakes and/or violation, actual or perceived, by us or our partners, agents, associates etc., of any of the Rules, Regulations, Bye-laws of the Stock Exchange, Mumbai, SEBI Act or any other laws in force from time to time.
The Stock Exchange, Mumbai is not answerable, responsible or liable for any information on this Website or for any services rendered by our employees, our servants, and us.

That by submitting the above mentioned details, you are authorising Kotak Securities & its sub-brokers & agents to call you and send promotional communication even though you may be registered under DNC.